Georgia’s glittering prospects

Countries in eastern Europe are rarely thought of as free-market paragons. But Georgia is a surprisingly dynamic and liberal economy. Ever since the early 2000s it has been pursuing market reforms and cracking down on corruption and red tape. It has done so well that the latest Ease of Doing Business rankings by the World Bank, a gauge of how conducive the regulatory environment is to starting up and running a company, puts Georgia in ninth place, only two notches below the UK and miles ahead of Germany, France and Switzerland.

The macroeconomic backdrop is also auspicious. The former Soviet republic, which straddles Europe and Asia, has seen its economy grow by 5.7% year-on-year in the first half of 2018, up from 4.5% in the same period last year. In 2017 GDP expanded by 5% as exports rose and remittances from abroad increased. The fastest growing areas included services and real estate.

A deal with China

Georgia’s most important trading partners are Turkey and Russia, but exports to western Europe continue to grow, notes Börse Online. The EU now accounts for almost a quarter of overall exports, which increased by 30% last year. Exports make up 50.4% of Georgian GDP, according to data from the World Bank. In the coming year exports are set to increase as Georgia has signed a trade agreement with China and can sell the Middle Kingdom popular goods such as wine, nuts, honey, tea, fruit and vegetables without incurring tariffs.

There is still ample scope for improvement, according to the International Monetary Fund. The export base can be broadened and unemployment is high and employment is concentrated in low-productivity sectors. And “the business environment can be further improved”.

The education system needs work and the country has yet “to fully exploit [its]comparative advantage” as a tourist destination in the region. After all, it is home to fabled Caucasus Mountain villages and boasts Black Sea coasts and resorts.

As far as foreign investors are concerned, this is an encouraging story, but also a risky proposition given the early stage of development and apparent dependence on the global cycle – witness the extent to which the economy still relies on exports.

Adventurous investors may wish to research three London-listed stocks: Georgia Capital (LSE: CGEO), the separately listed investment arm of the country’s top bank Bank of Georgia (LSE: BGEO). It’s a broad play on listed and unlisted businesses, says Börse Online. Georgia Healthcare Group (LSE: GHG), the No .2 health insurer with 78 clinics and 256 pharmacies, also has “glittering growth prospects”.

Stand clear of the junk-debt boom

Not too long ago companies wanting to borrow from capital markets would have to have strong credit ratings. But these days the largest category of US corporate debt is BBB, only a notch above junk.

The amount of BBB-rated debt neared $3trn in April 2018, says Sunny Oh on Market Watch. That’s equivalent to the annual economic output of the UK, and 50% larger than the US investment-grade bond market as a whole in mid-2007, “a time when a buildup of debt was blamed for exacerbating the damage induced by the financial crisis”. Then, BBB-debt comprised 26.1% of the entire investment-grade market, compared with 42.2% now.

The overall deterioration in credit quality is unlikely to be an immediate problem. Economic and earnings growth remain robust, and the ratio of corporate debt-to-GDP is barely higher than its previous cyclical peaks of 2000 and 2008, as Buttonwood points out in The Economist.

Still, investors should steer clear. A recession will come “sooner or later”, triggering credit downgrades and defaults. And the downturn will be more protracted than usual “if, as seems likely, there proves to be a shortage of buyers for a fresh supply of junk”. Company debt “is an asset class to be wary of in a maturing economic cycle” in any case. Snap it up early in a recovery when downgrades and defaults are still dominating the headlines. “There are likely to be more bargains than usual next time.”